a. Ratios Caculation.

1. Current ratio for fiscal years 2017 and 2018

- Current Assets :

 2017 : $12,500+132,000+125,500+50,000 = $320,000

 2018 : $18,200+148,000+131,800+105,000 = $403,000
- Current Liabilities :
 2017 : $91,000+61,500+6,000 = $158,500
 2018 : $79,000+76,000+9,000 = $164,000

Current Assets
Current ratio2017 = Current Liabilities = 2.02

Current Assets
Current ratio2018 = Current Liabilities = 2.46

2. Acid-test ratio for fiscal years 2017 and 2018

Current Assets - Inventories

Acid-test ratio2017 = Current Liabilities = 1.7

Current Assets - Inventories

Acid-test ratio2018 = Current Liabilities = 1.82

3. Inventory Turnover for fiscal year 2018

COGS2018
Inventory Turnover2018 = Average Inventory = 19.74 times

4. Return on assets for fiscal years 2017 and 2018

1,688,500+1,740,500
Average total assets2017 = = $1,714,500
2

1,740,500+1,852,500
Average total assets 2018 = = $1,796,500
2
 Net income2017
Return on assets2017 = Average total assets = 17.3%
2017

Net income2018
Return on assets2018 = Average total assets = 20.4%
2018

5. Percentage change in sales, COGS, gross margin and net income after taxes
from fiscal year 2017 to 2018

$3,000,000−$2,700,000
Sales revenue = = 11.11%
$2,700,000

$1,530,000−$1,425,000
COGS = = 7.37%
$1,425,000

$1,470,000−$1,275,000
Gross margin = = 15.29%
$1,275,000

$366,000−$297,000
Net income after taxes = = 23.23%
$297,000

b. Other financial reports which are helpful to commercial loans officer:

Statement of Cash Flow
Along with the income statement, the bank also studies the cash flow statement. This
statement details the sources of cash inflows as well as outflows. Cash in and
outflows during a particular financial period may be consequences of actions taken
a long time ago. The repayment of a loan taken out years ago will result in a
significant cash outlay and is featured prominently in the cash flow statement.
However, it is neither a profit nor a loss and will not be found in the income
statement. The bank therefore has to carefully consider how the company used its
cash resources to understand if it will have the cash to repay the loan.
The business plan
It should include:
 Summary of the business and its products and services
 Experience of the management team
 Competitive environment
 Target market
After the banker understands your business, the purpose of the loan and the method
of repayment, he will evaluate the bank's risks by using the five Cs:
 Character
 Collateral
 Capacity
 Capital
 Conditions
The Importance of Character
Foremost on the list is character. If bank doesn't trust you or think you're an honest
person, they will not approve your loan request. It doesn't matter how much collateral
you have, it will not be enough to offset a lack of trust.
The lender needs the confidence that the borrower has the experience, education and
industry knowledge to successfully manage the business. The borrower's reputation
plays a significant part in getting a bank loan. Your credit history will show your
track record for repaying debts.
The Need for Collateral
When a bank makes a loan, it determines a plan of how the borrower will repay the
loan. If the borrower defaults on the loan, then the bank falls back on the collateral.
A lender never wants to use the collateral to repay a loan, because the sale of the
collateral may not be enough to pay off the loan.
Banks like to take property and assets as collateral as a way to recover their loan in
the event the borrower fails to pay as planned.
Capacity to Repay the Loan
The borrower must show that he can repay the loan out of the company's cash flow.
The bank will analyze a company's debt-to-income ratio and the amount of its free
cash flow. Lenders like these ratios to provide a cushion in case the business takes a
downturn.
The Need for Capital
Banks feel more comfortable when the owner has his own money invested in the
business. Lenders like to know the owner will lose something if the business fails. If
the owner is not investing in his own business, why should the bank?
Banks like lending to companies with a lot of capital because it means the owners
have some "skin in the game." When owners have more personal capital in the
business, they will fight harder and sacrifice more to save a business and repay their
debts.
Overall Economic Conditions
Beside analyzing the borrower, bankers will look at the overall economy, industry
trends and even the direction of politics. They are thinking about factors beyond the
control of the business owner that will affect the performance of the company.
It is almost impossible to start a new business and finance its growth solely with
internally generated funds and owners' capital. At some point, small business owners
will have to approach their banks for loans. Understand the process that bankers go
through to evaluate their risks before you apply for a loan.
Detail Analysis Ratios
Debt-to-Equity Ratio
The debt-to-equity ratio allows lenders to compare the assets of a company with its
debt. All else equal, lenders consider companies with a high ratio of debt to equity
as a higher risk than companies with little or not debt.
Operating Margin
An operating margin expresses the profit a company makes as a percentage of its
total sales. This helps separate the gross revenue of a company and its net profit,
which gives a measure of a company's efficiency. Calculate the operating margin by
dividing income from operations by net revenues. For example, a company with a
yearly profit of $1 million from $100 million in sales, has an operating margin of 1
percent.
Current Ratio
The current ratio is a liquidity ratio that measures the ability to pay for expenses by
expressing the number of times assets exceed liabilities. This is similar to the debt-
to-equity ratio, although in this case, instead of dividing liabilities by shareholder's
equity, you must divide total assets by total liabilities.
Inventory Ratio
A company's purchasing and production efficiency can be measured using the
inventory ratio. This tells investors how many times a business sells its inventory in
a period of time. Divide the cost of the products or services sold by the cost of the
entire inventory. The higher the ratio, the more efficient the company is at turning
over its inventory, and lenders are more likely to consider it a productive and
successful business.
c. Assumptions that:

Sales revenue increases at a rate Depreciation remains constant at

of 11.11%.
Cost of goods sold increases at rate of
7.37%, despite depreciation
remaining constant.
Other operating expenses increase at the
same rate experienced from 2014 to
2015; i.e., at 10.26% ($80,000 ÷
$780,000).
$102,500.
Dividends remain at $2 per share.
Plant expansion is financed equally over
the two years ($150,000 each year).
Loan extension is granted.

Application:
(000 omitted)
2018 2019 2020
Sales revenue $3,000.0 $3,333.3 $3,703.6
Cost of goods sold 1,530.0 1,642.8 1,763.8
Gross margin 1,470.0 1,690.5 1,939.8
Operating expenses 860.0 948.2 1,045.5
Income before income taxes 610.0 742.3 894.3
Income taxes (40%) 244.0 296.9 357.7
Net income $ 366.0 $ 445.4 $ 536.6

Add: Depreciation 102.5 102.5

Deduct: Dividends (260.0) (260.0)
Note repayment (6.0)
Funds available for plant expansion 281.9 379.1
Plant expansion (150.0) (150.0)
Excess funds $ 131.9 $ 229.1

The financal situation of the company is healthy:

- The increase in revenue is higher than the increase in cost of good sold. That
means the profit can cover all cost for producting the selling goods.
- The valuation of dividends remain at $2 per share although the inflation.
- All ratios was cacluated in “requirement a” present a good financial
performance:
 The current ratio and quick ratios rises in continious year and higher than
one.
 The inventory turnover is highly circulating. Inventory doesn’t face to
slow moving condition.
In conclusion, Bradburn Corporation should be sastified to finance the plant
expansion from internally generated funds as shown in the calculations.
d.
Topeka National Bank should probably grant the extension of the loan, if it is really
required.
Because:
- The projected cash flows for 2019 and 2020 indicate that an adequate amount of
cash will be generated from operations to finance the plant expansion and repay
the loan.
- In actuality, there is some question whether Bradburn needs the extension
because the excess funds generated from 2019 operations. However, Bradburn
may want the loan extension to provide a cushion because its cash balance is
low. The financial ratios indicate that Bradburn has a solid financial structure.
- If the bank wanted some extra protection, it could require Bradburn to
appropriate retained earnings for the amount of the loan and/or restrict cash
dividends for the next two years to the 2018 amount of $2.00
per share. Typically, bank institutions have a definite number of days or period
when a borrower can file for a loan extension. They can still accept applications
even on the last day before the loan payment becomes dues.